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Strategies & Market Trends : Countries

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From: Sam Citron6/16/2010 9:37:20 AM
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France and Spain Proceed With Austerity Plans
June 16, 2010, 6:29 am

The French government proposed a series of measures Wednesday to rein in the budget deficit, including raising the retirement age by two years and increasing income taxes on the rich, Matthew Saltmarsh reports in The New York Times.

Spain also was set to announce contentious plans to shake up its labor market Wednesday, as countries across the euro area respond to investor fears about public finances.

In France, the minimum age for retirement will be lifted gradually by 2018 to 62 from the current 60, the minister for labor, Eric Woerth, told reporters. The government had considered raising the age to 63.

“It looks like a major step forward,” said Jean-Michel Six, chief European economist at Standard & Poor’s. He said the announcement appeared to be a compromise between the demands of investors for deep budget cuts and the need to retain a sense of social equality.

France has been slower than other European countries like Spain, Portugal and Britain to announce fundamental budget changes, partly reflecting the fact that its budget deficit is lower, while investor demand has kept the interest rates that France pays on its debt low relative to most euro-zone countries.

“Working longer is inevitable,” Mr. Woerth said. “All our European partners have done this by working longer. We cannot avoid joining this movement.”

Increasing the minimum age of retirement “respects the fundamental principals of justice,” he said, “an effort must be made by all the French and not just one group.”

The long-awaited shakeup of the French pay-as-you-go pension system included extending the number of years of work required to qualify for a full pension to 41.5 years in 2020 from 41 years in 2012.

The age at which workers who have not made full contributions can receive a pension without penalties will rise gradually to 67 in 2023 from 65 in 2018. Civil servants, who now pay 7.85 percent of their salary in pension contributions, will see their deductions rise to the 10.55 percent paid by private sector employees by 2020.

The government is seeking to hold on to its top-notch credit rating by showing it is serious about reining in spending and borrowing.

The pension system alone is forecast to have a deficit of €32 billion, or $39 billion, this year. That figure would have surged without any changes.

The retirements proposals will save nearly €19 billion in 2018 and should bring the pension system back into credit that year, while the tax increases will bring in €3.7 billion next year, the government said.

President Nicolas Sarkozy, whose rating in opinion polls has been tumbling, “decided to take the cautious approach and spread the reforms over several years to make them less painful,” Mr Six said.

Mr. Sarkozy hopes the changes will demonstrate progress toward cutting the national debt — 78 percent of gross domestic product last year — and enable France to hold onto its AAA sovereign debt rating.

There was a muted reaction to the announcement in financial markets; the yield on the benchmark 10-year French government bond was unchanged around midday Wednesday, while the CAC-40 index in Paris was up 0.3 percent in line with other European markets.

The changes are likely to meet stiff resistance from public sector unions and political opponents of the center-right government.

Leaks of the government’s plans have already sparked angry reactions from the opposition Socialist party and labor unions, which demonstrated against the proposed measures before they were announced and confirmed this week a call for a day of demonstrations and strikes by private and public workers June 24.

Mr. Woerth said he remained “open to discussion” with unions and others affected.

The plan is expected to be debated by lawmakers in September.

In Spain, Prime Minister José Luis Rodríguez Zapatero is facing intense opposition to his economic program. He was to present a plan to improve the labor market Wednesday.

Wary investors have sent Spanish borrowing costs up in recent days, after the Socialist-led government failed to win union backing for measures that it says are crucial for resurrecting the economy and allaying concerns about Spain’s public finances.

The Spanish prime minister is seeking to ease rules allowing lay-offs by employers in economic difficulty, while discouraging an over-reliance on temporary hiring to trim the 20 percent jobless rate, which is the highest in the euro zone.

Employers have said that the proposals do not go far enough, while unions have called for a general strike, although it might not occur until September.

The French government also announced a series of fiscal measures including an increase in income tax on high earners; the top rate would rise to 41 percent from 40 percent to be applied on earnings over €69,783.

In addition, companies would have to pay higher social charges to cover employees medical and unemployment coverage; some tax loopholes would be closed; a tax on home sales will edge up; higher taxes will be applied on stock options and dividends; and taxes on capital gains and investment income will rise slightly.

The shake-up is expected to be the last major legislative change of Mr. Sarkozy’s current five-year term, which expires in 2012.

“He’ll now focus on politics before the election,” Mr. Six of S&P said.

France has forecast a budget deficit of 8 percent of gross domestic product this year and has committed bring the deficit under 3 percent by 2013. Spain, which is in a worse situation, aims to cut its deficit to 9.3 percent of G.D.P. this year and 6 percent in 2011.

Other EU countries have responded to the problem of funding their aging populations already. Britain has announced plans to raise the retirement age to 68 from 65 starting 2044. Germany has agreed to increase the retirement age in steps to 67 from 65 by 2029.
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